Construction ends 2018 in the red amid weaker demand

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) dropped a further 1.9 points to 42.6 in December 2018, indicating a fourth consecutive month of decline and the sharpest rate of contraction in five and a half years (readings below 50 indicate contraction in activity, with the distance from 50 indicating the strength of the decrease).

Ai Group Head of Policy, Peter Burn, said: “Sharp falls in residential building activity together with a further drop in commercial construction and a slight dip in engineering construction saw construction sector performance record its sharpest monthly contraction since mid-2013. Activity and new orders were down across the four sub-sectors with the apartment sub-sector continuing as the biggest drag on performance. With construction accounting for close to 10 percent of both GDP and employment, the downturn in this sector will weigh on the overall economy. That said, levels of construction activity remain respectable by historical standards with infrastructure work in particular likely to continue to account for a significant proportion of overall activity. Despite the falls in activity and new orders, employment held up well as constructors held onto their staff in the face of growing skill shortages,” Dr Burn said.

HIA Acting Principal Economist, Geordan Murray, said: “The Australian PCI® finished the year on a soft note with all sectors of the construction industry recording declining levels of activity. The interplay between falling home prices in the major housing markets on the east coast and the restrictive lending environment weighed heavily on residential building during the latter stages of 2018. The sub-indexes of the Australian PCI® tracking activity in apartment and detached house building were both particularly weak, showing the sharpest rates of contraction since the beginning of the current cycle back in 2012. There is still a large volume of residential building work to be done on projects that are currently underway but as we progress through 2019 more of the existing projects will reach completion. The softening in Australian PCI® new orders sub-indexes suggests that the completed projects are not likely to be backed up by new projects entering the pipeline. The volume of residential building activity is set to fall in 2019. Residential building won’t be the driver of economic growth that it has been over the last few years,” Mr Murray said.

Australian PCI® – Key Findings for December 2018:

The activity index in the Australian PCI® contracted for a third month and at its sharpest rate in five and a half years (down 5.9 points to 35.7). This was associated with a continued drop in new orders (down 4.8 points to 41.0) and a reduction in deliveries from suppliers (up 0.5 points to 48.4).

Labour market conditions moved closer to stability with the employment index increasing by 5.1 points to 49.4, indicating a broadly unchanged level of total construction employment.

Across the four construction sectors in the Australian PCI® in December 2018, apartment building was the weakest performing sector, declining for a ninth month and at the sharpest rate since mid-2012 (down 2.7 points to 26.3). House building also fell further into negative territory (down 2.6 points to a six-year low of 35.4), while engineering construction fell into mild contraction for the first time in 22 months (down 2.6 points to 48.3). Commercial construction recorded a fifth month of decline (down 0.9 points to 45.0).

The input prices index remained elevated in December 2018 (down 1.1 points to 72.0), while growth in wages also continued (down 0.7 points to 60.9).

The selling prices index continued to contract in December 2018, and at a steeper rate (down 6.5 points to 40.6), with the ongoing gap between the input and selling prices indices indicating that profit margins remain tight across the construction industry amid strong competition in securing work.

Background: The Ai Group/HIA Australian PCI® is a seasonally adjusted national composite index based on the diffusion indexes for activity, orders/new business, deliveries and employment with varying weights. An Australian PCI® reading above 50 points indicates that construction activity is generally expanding; below 50, that it is declining. The distance from 50 is indicative of the strength of the expansion or decline.